Category Archives: China-U.S.

Coronavirus Could Nudge US-China Decoupling

Image of Apple iPhones by 3D Animation Production Company from Pixabay.

APPLE’S WARNINGS THAT its revenues are likely to fall short of expectations this quarter because of the impact of the coronavirus Covid-19 is a blunt reminder that supply chains, as well as sales, have been no more immune from disruption by the outbreak than any other aspect of the economy.

In truth, the economic disruption of the coronavirus is likely to be temporary, and firms cannot reconfigure overnight their supply chains nor the skillsets and relationships that underpin them. However, it offers foreign firms that might already be re-evaluating their supply chains in China one more excuse to pull back.

Reasons for doing so are various, from worries about the Trump administration’s protectionist trade policy to environmental concerns over carbon footprints and concentration risks from being over-reliant on a small set of suppliers in one country. Diversifying and shortening supply chains, even to the point of re-shoring production in the case of companies selling into the US market, makes sense to mitigate all those risks, even if it may bring new ones in the form of more complex and demanding management requirements and more possible points of failure and IP theft.

Regionalisation or domestication of global supply chains would be in line with the current trend of ‘deglobalisation’ but not without consequences. For one, it would solidify emerging regional trading blocks and patterns of trade. An East and Southeast Asian trade region with China as its hub is already coalescing. It would also weaken the interdependency between China’s economy and the United States.

In the pre-Trump era, trade was considered a matter of commerce and not national security. China provided manufacturing capacity, production engineering expertise, logistics capabilities and, decreasingly, low-cost labour in return for superior US intellectual property, design and innovation skills, branding and, decreasingly, an end-market. This equilibrium has been disrupted by both sides’ emphasis on national security and economic nationalism and the heightened role of technology as a dimension of the two nation’s contestation.

It is not unfair to say that the West underestimated how China’s ability to transform from fast follower to frugal innovator would be followed by its rise as a frontline innovator. That, the theory went, could not happen in authoritarian regimes where the government, not the market picked commercial winners, rote learning stifled innovative minds and, to use a Japanese phrase, the nail that sticks out gets hammered down.

However, that was not true for Japan at a comparable stage of development and is proving not to be the case with China, especially in areas such as artificial intelligence and quantum computing.

This is to the consternation of many in the United States where the assumption that US technological superiority is unsurpassable dies hard. China hawks in the Trump administration are consequently pursuing a range of initiatives to crimp China’s technological progress.

The campaign against Huawei, tightened further last week with more charges against the company of industrial espionage, is the most visible aspect. Yet this is just the spearhead of a range of initiatives to keep US technology, especially advanced and emerging technologies, from falling into Chinese hands by legal and illegal means.

Beijing’s response has been to accelerate the development of indigenous technology, both civilian and military, although the distinction is becoming less and less. The Made in China 2025 programme is the poster child for this.

Huawei has already shown it can produce smartphones without US chips. The bigger question that will be answered over the next couple of years is whether Chinese companies more broadly will be able to design and manufacture competitive end-products.

The risks to the United States are twofold. First, the loss of their Chinese markets to indigenous products would cut so deeply into their sales that it crimps their ability to spend on R&D needed to stay innovative. This would be amplified if China then dominated emerging third-country markets.

Second, and more seriously, this technological decoupling would be asynchronous: China would become innovative on par or better with US firms, but US firms would not necessarily regain their lost manufacturing and production engineering skills.

Reskilling a workforce is the unglamourous slog of long-term public policy-making for which the current US administration has little appetite.

Tim Cook, chief executive of Apple, once famously remarked that if he called together all the manufacturing production engineers in China, it would fill a couple of football stadiums; the same meeting in the United States wouldn’t fill a couple of rooms.

In an extreme but not inconceivable scenario, China’s reliance on the West could become the West’s reliance on China.

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Trump Ups Pressure On China Over Cyberhacks

Screenshot of FBI wanted poster for four alleged members of the PLA Fourth Department's 54th Research Institute in connection with the hack of the credit rating agency Equifax in 2017.

A REMINDER THAT the greatest deal in the history of the universe, or whatever US President Donald Trump called his Phase One trade deal with China, did not touch on one of the United States’ biggest beefs with Beijing, cybertheft.

Four alleged members of the PLA’s 54th Research Institute have been charged in the United States in connection with the cyberattack on the US credit rating company Equifax in 2017. Personal data of 147 million Americans and some UK and Canadian citizens were stolen in what was one of the largest data breaches in history.

The four were named as Wu Zhiyong, Wang Qian, Xu Ke and Liu Lei. Their whereabouts are unknown at it is highly unlikely they will ever appear before a US court.  The 54th Research Institute is based in Hebei and is overseen by the PLA’s Fourth Department, the military’s electronic and information warfare arm, including offensive cyber operations.

At a news conference announcing the nine-count indictment, US Attorney General William Barr called out other alleged cyberattacks by Chinese agents including on health insurer Anthem and the federal Office of Personnel Management reported in 2015, as well as a 2018 hack of the hotel chain Marriott.

US intelligence services believe that the Chinese government has been systematically accumulating personal information on US citizen and data-mining it for compromising details about individuals, including those in government and military service and academia, who could then be susceptible to blackmail and, thus, be potential recruits as spies. Washington also fears that this profiling exercise could also expose US intelligence agents working abroad.

Beijing has denied any such hacks and intentions.

When the Obama administration indicted five suspected PLA hackers in 2014 for allegedly breaking into the computer systems of several US manufacturing companies, it led to an agreement by China to cut back its cybertheft from US firms. Given the strained level of US-China relations tody, whether the Trump administration could get similar temporary relief if that is its aim in making this latest indictment public, is a different matter.

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UK 5G Decision Muddles UK-US and UK-China Relations

THE UNITED KINGDOM’S renowned ability to muddle through the middle is being put to the test. The Johnson government’s decision to allow Huawei a continuing role in developing the United Kingdom’s 5G networks is a case in point.

Beijing threatened repercussions on China’s trade and investment with the United Kingdom if Huawei was excluded. Washington threatened to cut off intelligence sharing with London if it was not.

The Trump administration is pursuing a global campaign against the telecoms giant which it accuses of spying for China, a charge the company denies. That campaign is a pivotal battle of the Trump administration’s technology war with China.

With Brexit barely hours away and the United Kingdom needing future trading relationships with both of the world’s two largest economies, wiggling along the fence bottom down and damn the splinters was Prime Minister Boris Johnson’s only option. It is a discomfort that will be familiar to US allies that are China’s regional neighbours.

Hence the Shenzhen-based telecoms giant will be allowed up to a 35% share of the UK 5G network’s periphery, i.e., the radio access network, but be banned from the most sensitive part, the core, and excluded altogether from areas near military bases and nuclear sites.

The 35% cap also applies to the rollout of the UK’s fibre broadband network, for which Huawei already has a 45% share. Similarly, the company currently exceeds the 35% cap in two of the three of the four UK mobile networks that deploy Huawei kit.

The government’s decision still needs the UK parliament’s approval. Voices in Washington are urging backbench MPs to oppose it for the sake of preserving the special relationship between the United Kingdom and the United States. They will also argue, correctly, that the core and the periphery of 5G networks are converging, so even periphery access now is a (not so) long-term security threat.

The Trump administration already regards the United Kingdom as an unreliable ally for moves such as joining Beijing’s Belt and Road-linked Asia Infrastructure Investment Bank against Washington’s wishes and for generally being more accommodating to China than it likes — although the Trump administration’s default view is that any ally that does not fall entirely in line with its wishes is unreliable. As the president had made calls to Johnson ahead of the Huawei decision, his next reaction is reliably likely to be petulant.

While the 5G decision will be as irritating to China as it is the United States, for Huawei, the win, in so far as it is not a defeat, comes as the Trump administration is seeking to bolster its barriers against the company gaining access to US technology. Washington has leaned heavily on its allies, although only with any success with Australia, New Zealand and to an extent Japan. European nations and the EU, bracing for a trade assault from the Trump administration, have been less accommodating.

Commerce Secretary Wilbur Ross says tighter restrictions are coming Huawei’s way. However, US reports have said that a proposal to further restrict US companies from selling computer chips and other components to the company, including for the first time via their overseas subsidiaries, has been delayed.

The defence establishment is concerned that the move would accelerate China’s drive to develop indigenous technology. At the same time, the lost sales by US firms could cut into their research and development spending, at the risk of blunting US military technological superiority.

On another front, court proceedings are underway in Canada to have Meng Wanzhou, Huawei’s chief financial officer and daughter of its founder, extradited to the United States to stand trial on fraud charges connected to alleged busting of sanctions on Iran. Meng denies the allegations, and the case could take years to resolve.

Prosecutors say Meng’s case is separate from the broader trade dispute between the United States and China. However, the inverse is true. The trade dispute is only a part of the more existential confrontation between Washington and Beijing for technological leadership in which the United Kingdom finds itself uncomfortably caught in the middle.

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Huawei Extradition Hearing Will Evaporate Trade Deal Goodwill

ANY FLEETING GOODWILL between Beijing and Washington generated by the signing of the phase one economic and trade agreement earlier this week is likely to evaporate early next week when a court in Vancouver opens an extradition hearing for Huawei’s chief financial officer Meng Wanzhou.

The United States wants to bring her to stand trial on charges of bank fraud in connection with allegations that she lied to HSBC about her company’s operations in Iran. Meng denies the allegation and is fighting the extradition attempt.

US Treasury Secretary Steven Mnuchin was at pains this week to underline how the Trump administration wanted to separate its trade and what he called national security issues with China. However, the message from President Xi Jinping read out at the signing ceremony calling for fair treatment for Chinese companies suggests that Beijing sees them of a piece.

There is little sign of the US campaign against the telecoms giant easing off. If anything, it is ramping up the pressure on allies to exclude Huawei from their 5G networks and is reportedly considering tighter restrictions on what US companies can sell to the firm.

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US-China Trade Deal: Not Much Win-Win; Not Much Loss-Loss

Screen grab or Annex 6.1 of US-China phase one economic and trade agreement, January 2020.

FROM THE SIGNING ceremony and the detailed text, this Bystander takes two overarching points from the new US-China phase one economic and trade agreement.

First, the agreement will work as long as China decides to make it work, and the deal provides a stick for the United States to help Beijing keep its mind resolved. Second, the biggest risk may be that what US President Donald Trump tells himself China has committed to do under the deal is different from what China thinks it has. Or, indeed, based on Trump’s inflation at the signing ceremony of the agreed numbers for Chinese imports of US goods and services over the next two years, what the agreement says.

For all the talk of this being an equal agreement, most of the commitments to action fall on China: the text contains 20 times as many ‘China shall’ as ‘the United States shall’ (h/t to Sinocism for that tidbit). That said, commitments and concessions are not the same, and what concessions there have been on both sides are small, even if China, on balance, made more and still faces tariffs on the majority of its exports to the United States.

However, over two years of intensifying tariffs pressure, Beijing successful resisted US attempts to make fundamental structural changes to its economy, which may be its biggest win of all.

Most notable among the ‘China shalls’ is strengthening its intellectual property protection, including providing better legal remedies to aggrieved foreign companies, and greatly increasing its imports from the US over the next two years.

The latter is largely a question of money and capacity to absorb the imports, plus dismantling non-tariff barriers.  One set that will go immediately pertains to low-risk foodstuffs, which will be able to be imported requiring only US Department of Agriculture health and safety certifications.

The former is the direction that China’s economic reformers are headed regardless as they move the economy up the value chain, resulting in more Chinese companies with intellectual property to protect and brands to defend from counterfeiting and piracy.

The same is true for pharmaceutical and financial-services market opening, and for the commitment not to devalue the currency competitively.  Even in the area of agriculture and food, the changing expectations and appetites of middle-class consumers for a safe, varied and international diet makes 1970s-90s-era protectionism for farmers as outdated as it is in most countries.

In that sense the, new agreement pushes on an open door, at least at the national level. Implementation will be key. Local government can be more recalcitrant and inconsistent, but the new Foreign Investment Law takes that on, as it does another long-standing complaint of foreign businesses, forced technology transfer, now explicitly forbidden.

If we set aside the loopholes, those are two ‘deliverables’ in the new trade agreement already delivered, as are many of the other commitments. That prompts the thought that this is a deal that could have been papered much earlier, saving many months of tariffs-induced pain on both sides.

There is no doubt that there are many cracks through which implementation could fall, intended or otherwise. That is where the stick comes in. Including an enforcement mechanism in the agreement was non-negotiable to the United States.

Part of that is just greater transparency required of China. It will need to provide regular reports of enforcement actions over IP infringements, institute a mandatory 45-day public comment period for all changes to IP rules and regulations, and present by mid-March an ‘action plan’ with deadlines for further IP protections. That will be more sunshine than to which many are accustomed.

But the heart of enforcement will both sides having compliance teams charged with monitoring the other side’s implementation and then resolving any disputes where one side feels the other is falling short.

The text offers little insight into how the monitoring will be done. There will be regular meetings between the staff of the two compliance teams, but points of complaint will likely have to come into each team from companies. That may test some companies’ willingness to put their heads above the parapet.

It will be up to each team to investigate complaints brought against their country. Resolution is to be reached by consensus within set deadlines. If it cannot be achieved, the complaint gets escalated up the chain of command. If it reaches the highest political level (a designated vice premier and the US Trade Representative) still without resolution, the aggrieved party can take punitive actions (e.g., slap on tariffs) without fear of retaliation.

If it believes the other side has acted in bad faith, it can withdraw from the agreement unilaterally. Either side can end the agreement with 60-days written notice. A Trump tweet will be the perennial wild card.

This procedure looks rickety. It has the feel of an effort by the Chinese negotiators to insert as much process into disputes resolution as possible short of denying the Trump administration the ability to restore tariffs unilaterally if the US president takes it into his mind that China is no longer adhering to the agreement. If he can say he can do that, he probably does not care too much about the rest of the details.

The mechanism may get to November this year unscathed. However, it would be a bold Bystander who would bet on it getting through another four years after that, especially if the incumbent US president is re-elected to office.

As has been noted here and widely elsewhere, phase one tackles a limited range of the issues at dispute between the Trump administration and Beijing. Unresolved and probably intractable fundamental differences over China’s state-led economic model, including government support for Chinese enterprises, indigenous technology development under Made in China 2025 and cyber theft, are deferred to Phase Two.

That will start, Trump says, as soon as he visits Beijing soon. However, it is unclear when substantive negotiations will start and even less so when they will conclude, if ever. China is in no hurry on either front.

It may be that the only way forward will be small, issue-specific settlements. It  remains hard to envision a comprehensive phase two acceptable to the United States that would not undermine the Party’s monopoly grip on power, equally unacceptable on the other side.

Meanwhile, one way we shall amuse ourselves is by filling in the blank order grid in the agreement (see screenshot above) for the $200 billion of additional US imports China promises to buy this year and next over and above the baseline level of 2017’s imports, the last year before the tariff wars.

We have the high-level numbers for the four categories, manufactures, energy, agriculture and services, but no details. These are being kept secret to avoid price and supply distortions in the market, it is said. We suspect there is still work being done on the final numbers down in the bowels of the international trade categorisation system at the six-digit level, and on China’s capacity to absorb such an increase in imports over that relatively short time.

One question the text of the deal has answered, however, is on how the agricultural imports numbers will be got to add up to their targets. The answer is that ethanol purchases will count under agriculture. US ethanol is produced from corn.

China, too, converts some of its corn stockpiles into the fuel. Like their US counterparts, Chinese farmers will now have to start making calculations about how much acreage to plant in the light of the import targets and how much to devote to soy in the face of falling demand for soy meal for hog feed because of the African swine fever epidemic. Such are the real calculations of trade wars.

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US-China Trade Deal: A Less Than Wonderful World

Vice Premier Liu He and US President Donald Trump present the signed US-China Phase One economic and trade agreement during a ceremony at the White House in Washington DC on January 15, 2020. Photo credit: Xinhua/Wang Ying.

DONALD TRUMP TODAY applied his humungous signature and, in a tiny but telling sign of the continuing competition between the two powers, Vice Premier Liu He inscribed his name in matchingly large characters on the Phase One US-China trade agreement. The signing of the deal in a White House ceremony signals a pause to the escalating tariffs war between the two countries, but, as this Bystander has noted before, far from its conclusion.

The US president left the room to the strains of ‘What a Wonderful World’. Nonetheless, the next year and beyond in the world’s most critical bilateral relationship is likely to be uneasy. As Liu noted, both sides now must focus on the implementation of the deal.

However, even what that deal is still seems open to interpretation. In another telling couple of moments during the signing ceremony, Trump said that China had agreed to buy $50 billion worth of US farm produce. In his remarks, Liu put the figure at $40 billion, which is in line with the numbers in the actual agreement behind Trump’s signature.

Game on.

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Taiwan’s Tsai Looks Set For Unpredictable Second Term

resident Tsai Ing-wen of Taiwan, seen in 2016. Photo credit: Voice of America. Public domain.TAIWAN GOES TO the polls on January 11 to elect a president and legislature after a campaign in which China’s social media influence and what the protests in Hong Kong might foreshadow for the island have taken the spotlight.

President Tsai Ing-wen looks set for re-election, her China-sceptic stance aligning well with the two dominant issues of the campaign. Since the protests in Hong Kong have begun, her poll numbers have risen as those for the pro-China opposition presidential candidate Han Kuo-yu have fallen.

Her victory would do little to ease cross-Strait tensions. However, Beijing will likely restrict itself to political bluster over reunification and military posturing, such as further aircraft carrier group passages through the Taiwan Strait, at least until the endgame in Hong Kong becomes clear.

Meanwhile, Taiwan’s international diplomatic standing will continue to erode and its economy will struggle to escape its long-term sluggishness.

The wild card is the US-China relationship.

As part of its confrontation with Beijing, the Trump administration has been more supportive of Taipei than its immediate predecessors. The newly elected US president controversially took a congratulatory call from Tsai in December 2016, throwing into doubt US commitment to the ‘One China’ policy it has pursued since 1979.  More recently, he approved sales to Taiwan of US military equipment including critical fighter jets, and by starting to draw it into US-led regional security arrangements.

Closer alignment with Washington is a two-edged sword. It will leave a re-elected Tsai hostage to the state of US-China relations, relations that under Trump, who faces his re-election in November, will continue to be unpredictable.

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